Gold is Timeless Money
Monthly ColumnBy Daniel A. Barnes, Barnes Capital
Gold is timeless money. For five millennia gold has represented wealth, and maintained its purchasing power over time. I believe we are in about the 5th inning of a bullish gold cycle.
If you’ve read my article, google “Tangible vs Financial Assets”, then you know that I believe that tangible and financial assets oscillate in 20 year cycles of outperformance and underperformance. Tangible assets are real estate, commodities, precious metals, gems and collectibles. Financial assets are IOU’s: either debt (bonds) or ownership interests (equity).
In 2006 I believed that bonds and equities would deliver below average returns over the next 5-10 years while gold and other tangible assets represented attractive assets. Since 2006 much has changed, but the fundamental reasons behind including gold in your portfolio have not changed. If anything, the case for gold has become even stronger.
Why Buy Gold?
- Diversification: The theory of diversification is that you always want some of your assets moving in the opposite direction of your other assets. Historically, Gold is inversely correlated to the dollar, and it is not correlated to stocks, or bonds. As such, it’s pretty likely to do well, when stocks and bonds have modest or negative returns.
- Supply: The bear market in Gold lasted 16 years, from 1984 until 2002. Funds for exploration of existing and new mines evaporated and very little exploration occurred. At the same time reinvestment in existing plant, equipment, and exploration was nominal. As a consequence of 20 years of under-investment, annual gold production has been in decline for the last 4 years. Current mines have not been able to replace their reserves. It takes 7 to 10 years to bring a new gold mine into production, so any new discoveries today are many years away from fulfilling new demand.
- Demand: In the same period of time, a billion new souls entered the planet, and China and India, the two largest consumers of gold and silver, increased the size of their economies by about 700%. Gold is sold to the middle and upper classes of China and India by the gram for $30 to $40/gram. There are different reasons why Indian and Chinese citizens are comfortable keeping their net worth in gold: from the tradition of gold jewelry (the dowry) in Indian weddings, to the experience over the millennia which have excised the wealth of the Chinese merchant class as political systems and currencies have come and gone.
- Inflation Hedge: The nature of things is that prices rise. They do so, because the alternative, deflation, is worse. Gold, above all else, is an accepted standard of value that cannot be depreciated. If you look at what an ounce of Gold bought 100 years ago, it bought a nice set of clothes. Today, $950, (the current price of an ounce of Gold) still buys a fine set of clothes. That may not sound earth-shattering, but it is. A dollar in 1945 bought a nice steak dinner with drinks and everything at a very good NYC restaurant. What does that meal cost today, $100, $200? Theoretically one can say that your investments would have compounded at a rate in order to grow from $1 to $100. And they may have, but then again, they may not have.
- Standard of Value: No matter what governments do: inflate currencies, conduct war, hyper inflate, gold has retained its purchasing power over five millennia. In the world today there are only a couple of currencies that are older than 200 years old. Investors know that gold will have an approximate value in 20 years of what it has today. That is comforting knowledge indeed.
For additional information about understanding what is driving Gold prices, look at US Global Investors excellent page at: http://www.usfunds.com/landingpages/whats_driving_gold/